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July 04, 2017

On the CDU’s programme

An expression that has recently caught the German political debate is "asymmetric demoblisation". It came from a pollster, Forschungsgruppe Wahlen, who had identified this as Angela Merkel’s electoral strategy in 2009 and 2013. It means ensuring that the opponent's voters stay at home because they are no longer afraid of you. The SPD suffered from extremely low turnout among its core supporters in both elections, and as a result ended up with disappointing results. 

Virtually every stand-up comedian in Germany has taken on this subject and is trying to give their own definition of what it might mean. The problem with this discussion is that the CDU/CSU’s strategy of essentially imitating the other party’s agenda in order to neutralise them is now becoming painfully transparent - so much so that it might backfire. What might have been smart in 2009 and 2013 may not be so smart today. 

We very much like FAZ’s comparative analysis of the programmes between CDU/CSU and SPD, which finds that they are essentially the same - with minor nuances. There is more disagreement within each of the parties than between them. The CDU/CSU promises 15,000 more police for the fight against crime and terror. The SPD is calling for an extra 15,000 police at both federal and state level. There seems to be magic in the number 15. Both the CDU/CSU and the SPD are promising tax cuts of €15bn, about 0.5% of GDP. There are minor discrepancies on distribution, but even these are relatively subtle. There is, for example, no disagreement on the top tax rate. 

We noted a comment by FDP chief Christian Linder, who said that the CDU’s programme reflected the ghost of the grand coalition.

There are several other areas too numerous to list in a note like this where the party programmes are literally identical.

There are some oddities though. The CDU/CSU wants to halve the number of unemployed by 2025, which seems extraordinary given that Germany must be running at close to full employment. The only way to achieve a further 1.25m cut in the jobless figures would clearly involve continued wage repression. On the eurozone, the parties also have more in common than what divides them. Both favour a European Monetary Fund, while the SPD explictly supports a common eurozone budget but without giving any details. The CDU/CSU said it is ready to develop the eurozone together with President Emmanuel Macron, but it categorically rejects debt mutualisation.

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July 04, 2017

Macron defines his presidential style

Emmanuel Macron's address in Versailles was more about form than content. For the first time a president outlined the principles of his presidency to the parliament directly. No speech on Bastille day, no media interviews. Most of his discourse was about principles and about institutional reforms: reducing the number of deputies and senators by one third; a simplified legislation process; a revision of petition rights; reforming the economic and social council into a significant consultative force; eliminating the court of justice (where former parliamentarians judge over the misconduct of the incumbent government members); a reform of the regional dialogue; and lifting this autumn the state of emergency in force since 2015. One new announcement was to introduce a dose of proportionality into the voting system. The time schedule is ambitious: Macron gives himself one year to get these institutional reforms through. And the roles are clear: Macron remained abstract and left the more concrete (and controversial) pledges such as labour reform to his prime minister. As for Europe, Macron got emotional, saying that Europe has lost its way, weakened by too much bureaucracy and scepticism. He insisted that it must be revived by a new generation of leaders. His discourse is certainly the most pro-European among the younger leaders in Europe.  

What were the reactions? Satirists depicted him as Jupiter or Louis XIV. Many deplored that he only repeated his campaign promises, and that at an extraordinarily high cost (€600,000). Editorialists tried to decipher whether Macron is more likely to become a hyperactive president or return to a more traditional role, and produced no evident answer. These are all comparisons with past role models. Nicolas Beytout writes that Macron's discourse stayed away from spectacular announcements and its defining lines are the urgency to act, effectiveness of change, and free choice. Cécile Cornudet warned that, by staying abstract and leaving the action part to the prime minister, Macron deprives himself of the possibility to give his national unity speech gravitas and heart. Macron announced that he will do this every year from now on.

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July 04, 2017

Why do we criticise modern macro?

Regular readers of Eurointelligence will have noted our gradual disillusionment with the various rational expectations models that have dominated the worlds of macroeconomics and central banking. They have long passed the infamous "wrong but useful" threshold, to the point that they are now not just useless but dangerous because they drive policymakers to make wrong decisions.

We noted two recent discussion on the state of modern macro (not quite so modern any more). Joseph Stiglitz made the point that the two variants of the DSGE models - real business cycle and New Keynesian - which intented to put macroeconomics on solid theoretical foundations, ignored many analytical subtleties and, more damagingly, made a number of wrong ad-hoc assumptions which are simply not true, for example on money demand. 

Diane Coyle offers a spirited discussions of alternatives to rational-expectations-based modeling, citing work from Andrew Lo on adaptive markets and Deirdre McCloskey on the importance of values and norms. Coyle accuses critics of modern macroeconomics of ignoring that there is so much new stuff going on that is now becoming mainstream.

"One might wish for faster change, for colleagues to turn away from their statistical packages and read more economic history, and for policymakers to appreciate that they are acting within a time warp. But the long era of hegemony for mainstream neoclassical economics is over."

We would argue that the criticism of modern macro is related to the continued dominance of its ideas and models in the mainstream macroeconomic discussion, especially in central banks and governments. The economics profession, more than others, has a tendency to respect its elders to the point of sycophancy. People criticise the macro mainstream because it holds on to power.

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